Ever since OTG became something like a curse word for many during the big 3M 1860 scams in the summer, many clients decide to stick for a “safer” alternative: production contracts. This usually means that the products are not yet produced but will be shipped over a period of time directly from the factory to it’s destination. But are production deals that much safer than hunting for ready stock? Let’s see the facts about this.
Who is involved in a production deal?
The concept of a production contract would be that a company wishing to buy a certain product cuts out all the middlemen and companies and makes a contract directly with the manufacturer. In other words, there is the manufacturer and the buyer. This contract usually contains the quantity, the timeframe, the installments and transport methods. The incentive of such a direct relationship is that the price is considerably lower than for products already produced, and the buyer perceives it as a safer alternative because of the direct relationship with the manufacturer. However, it also has downsides: many smaller manufacturers don’t have logistics to transport the goods themselves and the buyer has to organize customs and transportation, and they often require a downpayment to start the production.
So what is the problem then?
This system sounds perhaps good, but in most cases, manufacturers are already fully booked for years in advance and don’t have any excess capacities. So how come there are still plenty buyers searching for production deals? Because many companies have bought themselves the capacity (ie. made the downpayment), and now they are selling these as “production deals”. Picture this: a year ago a company that had sufficient funds purchased production at several smaller manufacturers for a good value. Now, that the prices are constantly rising, this company can either distribute the products directly to end-buyers, or find other companies that don’t have such an access to the manufacturer, and sell it to them as well. Sounds familiar? That’s right: these companies are the so-called allocation holders. They essentially managed to establish a secondary supply channel, that co-exists with the normal “manufacturer-distributor-retailer-end buyer” channel.
How production deals got overrunned with brokers and scammers
We could debate all-day long whether the birth of such an alternative supply channel is a good or bad thing. Personally, I’m rather against it, because the allocation holders sell it to other re-sellers, who sell it to other re-sellers as well, and the end-buyer receives the product after it has passed several stations and has an insane price… But that is not the question. The problem here is the same as with other transactions: the joker brokers and scammers. It seems like they have evolved in their own bizarre way and are now present in production deals as well. Which is understandable, because nowadays it is getting harder to find imbeciles that believe in billions on the ground. This phenomenon is actually easy to spot: you can see the same misguided terminology and documents getting passed from broker to broker that were used with on the ground deals, they just modify quantity and add a timeframe. Now it is not 20B OTG, but 24×100 million production deal… and it obviously starts with LOI+LOA+ICPO. As usual, when dealing with these misguided souls…
How are people scamming with production deals?
First of all, there is the good-old fishing scam: brokers trick you into believing they are an allocation holder or are in contact with an allocation holder, and they go fishing with your documents all over the brokersphere. This is a recycling of the fishing scams seen in OTG deals, with no big difference here.
Secondly, there has been an increase in scam-brands. These are essentially the re-birth of the “pay in advance” scams used in the early days of the pandemic, and the aim of the game is to get the buyer to make a downpayment. It is usually something like this: you get approached by a no-name brand with often fake certificates, that either claims to own a production facility, or poses as an OEM brand claiming to be manufactured at a reputable factory. But as you go deeper in that rabbit hole, and make a downpayment, you either won’t receive anything, or you will find that the boxes are empty or contain sand… or worse.
Thirdly, there are the repackagers. This itself would not be a scam, because there is physical product present, but it is, because these are not manufactured by the company. They just buy cheap, unbranded gloves in bulk, repackage them, and sell it to you as their own brand, or as a product manufactured by a major company. The problem here is that you don’t get what you paid for, and these gloves have usually a far worse quality than those made by respectable manufacturers.
How can you protect yourself from production scams?
When dealing with an allocation holder
- Always verify if he has a contract with the brand he’s an allocation holder for.
- If you receive these documents, verify their originality by contacting the manufacturer.
- Make some research on the company: if he is an allocation holder, he must have a large capital, because he had to make the downpayment. If it is a newly founded shell company with no verifiable capital, leave.
- Ask for Bill of Ladings and commercal invoices of past transactions if in doubt.
When dealing with a manufacturer
- Verify the documents he presents: look them up in the FDA’s or other inspecting authorities database.
- Always make a carefull metadata analysis of the documents to see if they are forged.
- Verify the company’s background and financial status. It is expensive to start a brand, so if you don’t see their financial capability, you are most likely scammed.
- If they claim to be an OEM brand, always verify with the actual manufacturer if they have any relationship with each other.
These practices can save you a lot of headache, however the most important thing is to be always vigilant and make due diligence on every company you encounter in this business. However, keep in mind: there are exceptionally reliable and professional smaller manufacturers, and new companies that have started manufacturing recently, and if you find one, you essentially find gold, so it’s worth the effort.